What will happen to rental prices in 2016?

The rental market has once again demonstrated consistent growth across 2015, paving the way for a solid 2016, despite a number of changes set to be introduced in the coming twelve months.

Our November Rental Index showed the market has experienced significant annual growth in 2015. As of November 2015, the average UK rental value – excluding London – stood at £743, an increase of 3.8% compared against last November's figure of £718. This growth is consistent across the country, with nine out of twelve regions demonstrating an increase in rental prices on an annual basis.

Unsurprisingly, growth across London this year was particularly high, with rents in the capital now 108% higher than the rest of the UK. Reflecting on the year as a whole, annual rental growth in Greater London has slowed from a peak of 12% in January 2015 to 6% by September, our latest figures show.

Demand for rental property continues to grow, and looks as if it won’t falter any time soon. In the past year, house prices have risen by £20,000 on average, tipping the house value scale to an average of £287,000, according to Rightmove.

The portal has also predicted that during 2016, house prices will increase by a further £17,000; possibly making it increasingly more challenging for first-time buyers to save a sufficient deposit, meaning they could be likely to remain tenants or, if they aren't already, turn to renting instead.

This shift of potential home owners into the Private Rented Sector (PRS) has increased the size of the rental market exponentially in the past decade or so. Back in 2001 there were 2.3 million private renters in the UK, increasing to 5.4 million in 2014. Sector growth doesn't look like it’ll stop there, either. In the next ten years, global business firm PwC has estimated that a further 1.8 million people will rent privately, meaning that half of all UK residents will form part of the PRS.

The recently released Autumn 2015 Rent Check by Allsop reflects this estimated increase in the number of UK tenants. In the survey, 41% of landlords claimed that there has been a definite increase in tenant demand in the last six months alone. This is of course a positive situation for letting agents and landlords, as it means that there will be a larger pool of potential tenants looking to snap up each rental property, minimising void periods.

Looking again to 2016, tenant demand doesn’t look as if it is going to subside anytime soon. That said, some tenants may find their search for a rental home more difficult as a consequence of recent stamp duty changes.

In the latest Autumn Statement, the Chancellor George Osborne announced that as of April 2016, all buy-to-let investors and second-home owners will pay an additional 3% stamp duty tax when they purchase a property.

Potential investors can and still will benefit from incredibly low interest rates, which have been at a low of 0.5% since March 2009, making it cheaper to borrow; going some way to counteracting the tax increase.

These changes will have consequences for the rental market as a whole, though. Between now and April 2016, there will be a 'rush to buy', according to a property commentator from the Office for National Statistics (ONS).

These stamp duty changes provide a great opportunity for letting agents to encourage their landlords to invest in additional buy-to-let properties before the April deadline. Paul Smith, chief executive of Haart estate agents, has agreed that aspiring buy-to-let investors could 'flood the market' ahead of the changes.

The general trend in the rental market is that prices will continue to increase in the New Year, although growth may not be recorded at quite the same pace. Global property firm Jones Llang Lasaalle has estimated that across 2016, the average UK rent is set to rise by 4.5% and an additional 4% in 2017.

However, Adam Challis, JLL’s Head of residential research, said that “there maybe slightly less exuberant enthusiasm from new investors, which may have a longer-term impact on rental supply”.

This steady yet continuing growth is evident in many of the UK's high-end estate agents' predictions, too. Savills has predicted a similar rental growth, estimating that between now and 2020; rental values will increase by 16.5%. London’s growth is set to be even more significant, with 22.8% total growth expected by 2020.

Savills has also warned that it would be wise to be aware of the shift in demand for certain types of rental property too. The agency says that in areas where the demand and supply imbalance is most concentrated, the demand for larger properties will be maximised next year.

Contrastingly, 34% of landlords claimed that they would increase their rents over the next year, this perhaps indicates that the stamp duty tax implementation, as well as the scrapping of the formal Wear and Tear Allowance, could force some landlords to charge a higher rent.

The majority of landlords we surveyed claimed that being able to retain good tenants was their biggest concern, this is why many are likely to incur just a marginal rent increase in order to increase the chances of keeping hold of their current tenants.

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